2 Scandals Hang Over Top Tech Lawyer

The head of a firm tied to Silicon Valley's stock options probe is also HP's outside counsel.

Larry Sonsini has worked behind the scenes to represent Silicon Valley companies for more than three decades. Now, two business scandals shine a spotlight on his work.

By David Streitfeld
Times Staff Writer

September 17, 2006

PALO ALTO — He's hardly a household name, but Larry Sonsini is among the handful of people who can take credit for creating the technology powerhouse that is Silicon Valley.

For more than three decades, Sonsini has been the behind-the-scenes attorney guiding such companies as Apple Computer Inc., Netscape Communications Corp., Pixar Animation Studios Inc. and Google Inc. through the thickets of stock offerings and growing pains.

Along the way he became a local legend: the favorite consigliere, the power broker, the lawyer who thought like an entrepreneur.

"There's always a lawyer in every community who's the go-to person for wisdom, someone whom everyone wants a piece of. In Silicon Valley, it seems to be Larry Sonsini," said New York University law professor Stephen Gillers, a specialist in legal ethics.

Given his omnipresence, perhaps it's no surprise that Sonsini, 65, finds himself linked to two very different scandals roiling Silicon Valley.

First came the stock options mess. Federal regulators are combing the records of at least 30 Silicon Valley firms to see if they illegally rewarded employees with options to buy company stock at artificially low prices through a process known as backdating.

Sonsini's firm has done work for about half the local tech firms under investigation, and Sonsini was formerly a director at Brocade Communications Systems Inc., where two former executives have been charged with criminal wrongdoing.

Then there's the trouble at Palo Alto-based computer maker Hewlett-Packard Co. The HP board revealed that it spied on its members as well as on reporters by collecting their phone records. The disclosure triggered a criminal investigation and a shake-up on its board of directors.

Sonsini's role as outside counsel to HP is drawing intense scrutiny. Corporate governance experts were stunned by the disclosure — reported by the Wall Street Journal and not denied by the company — that he ran the board's emergency meeting last week.

"It raises new questions about his judgment as well as the judgment of the board members," said Gary Lutin, a New York investment banker and an advocate for shareholder rights.

"Even if you ignore the fact that he wasn't elected to anything, why didn't someone question the idea of turning their meeting over to the guy who'd told them not to worry about getting personal phone records without permission?" Lutin asked.

HP Chairwoman Patricia Dunn launched the investigation into the board last winter after discussions from a closed-door meeting were leaked to an online news service. At a board meeting May 18, she said director George Keyworth II was the culprit, and the board demanded his resignation.

Keyworth refused, but fellow board member Thomas Perkins quit in protest over Dunn's tactics.

E-mails obtained by The Times suggest that Sonsini didn't know about the board investigation at first. But he appears to have given it a thumbs-up once Perkins asked him about it in a series of e-mail exchanges.

The investigators, Sonsini wrote Perkins on June 28, "did obtain information regarding phone calls made and received by the cell or home phones of directors." He added that "the process was well done and within legal limits."

According to state Atty. Gen. Bill Lockyer, however, laws were broken and criminal charges could be filed as early as this week.

Alex Simpson, an attorney who runs a corporate and securities law blog, said Sonsini apparently failed to foresee the repercussions from the board investigation and the need to devise a damage-control plan.

"He couldn't have made the situation go away, but he could have made it look better," Simpson said.

Others are harsher. Forbes magazine publisher Rich Karlgaard labeled Sonsini "the bad guy in the HP mess." Sonsini should be fired immediately "in the most public way," Karlgaard wrote on his blog.

Sonsini refused to comment, but his spokeswoman said, "For 40 years, Larry has built a reputation as a trusted and principled advisor to companies across the country. His reputation speaks for itself."

One of the issues state and federal investigators are expected to examine at HP involves how Perkins' resignation was publicly disclosed.

When board members quit because of a disagreement about a company's operations, policies or practices, the firm is required to immediately disclose the circumstances. But in announcing Perkins' resignation May 19, HP merely said it was effective immediately. It gave no reason and made no mention of his anger over the probe.

In a subsequent e-mail, Sonsini referred to Perkins' resignation as a personality clash with Dunn.

"Remember," Sonsini wrote Perkins on June 19, "you confirmed that you did not have any issues with HP or the board as a whole."

On July 28, Perkins sent an e-mail to board members and Sonsini saying the tactics used to investigate board members were illegal because they involved "sub rosa surveillance" of personal communications. In August, Perkins sent an undated letter to the same parties saying he had not received any response to his July 28 note and that he would alert authorities.

HP did not file a full explanation with regulators until Sept. 6, after Lockyer and the Securities and Exchange Commission had begun looking into the matter. Congress has now gotten involved as well, with the U.S. House Energy and Commerce Committee asking Sonsini and others to testify at a Sept. 28 hearing.

The hearing will put Sonsini in the public spotlight, a place he has never sought to be.

After getting his law degree from UC Berkeley in 1966, Sonsini headed 40 miles southwest to Palo Alto, home of Stanford University and not much else.

There was high-tech industry in the Santa Clara Valley area then — HP had begun more than two decades before — but the area was regarded as a legal backwater.

Sonsini, though, had the blood of an entrepreneur. He wanted to create things. He joined a four-member firm and began to capitalize on two things he had learned as the captain of his college football team.

Here's the first lesson, as the attorney recounted it for California Lawyer magazine in a 2004 profile: "Once the whistle blows, you try to beat the … out of the other guy."

And here's the second: After the game, go to the visitors' locker room and ask them out for a beer.

By 1973, his name was part of the firm's. In 1980, the firm was selected to handle the legal side of Apple Computer's initial public offering, the biggest since Ford Motor Co.'s in 1956. By one estimate, 104 people in the Silicon Valley became millionaires on the day of the offering.

Over the years, Sonsini made many more people rich, including himself. He didn't invent the technology, but played a key role in creating the legal and institutional framework that allowed the entrepreneurs to concentrate on their work.

When a company completes its public offering, those involved receive inscribed Lucite cubes commemorating the event. In 1989, wrote Silicon Valley historian Michael Malone, Sonsini "had so many IPO Lucite cubes on his shelves that they nearly demolished his office and killed a secretary when they fell during the Loma Prieta quake."

By 1992, there were 220 lawyers at the firm. At the end of the decade, there were 800. The former legal backwater boasted the biggest law firm in the state. In 2001, according to Thomson Financial, it had a third of the mergers and acquisition business in the technology field.

After the dot-com collapse, Wilson Sonsini shed hundreds of lawyers. Last year, California Lawyer ranked it fourth in size in the state. Its share of tech deals fell to 8%.

It has remained a leader in other ways. Corporate Board Member magazine placed it 16th this year among the most admired firms in the country, and National Law Journal called Sonsini one of the 100 most influential lawyers.

Some rankings might change as both scandals play out. But if Sonsini has acquired more critics in the last few weeks, he still has plenty of supporters.

"This is a double whammy, but to view this as anything more than coincidental would be pushing it," said Stephen Diamond, a specialist in corporate governance at Santa Clara University. "There's a lot that can go on in a company that, for better or worse, is not under the control of the outside counsel."

Yet even Diamond, who was an associate at Wilson Sonsini from 1995 to '99, says the scandals "raise the question of whether the valley is paying proper attention to the regulatory environment. This is a laissez faire, hands-off place."

That's part of the problem, said Bruce Schneier, a Silicon Valley consultant on security matters.

"In Silicon Valley, it's always a race to see who could be more aggressive. This is just another example," said Schneier. "I wonder what the lesson will be. Don't do that? Or don't get caught?"